Easing price pressures in the U.K. dragged on the British Pound during the European trade, and the sterling may continue to retrace the advance from earlier this month as interest rate expectations falter. The GBP/USD slipped to 1.6226 as consumer prices in the U.K. slowed to an annualized 4.0% in March after expanding 4.4% in the previous month, while the core rate of inflation fell back to 3.2% from 3.4% in February. As the risk for inflation cools, it seems as though the Bank of England will maintain its current policy throughout the first-half of the year, and the central bank may look to support the real economy for most of 2011 as the ongoing slack within the private sector bears down on price growth.

In turn, there is a high probability that the BoE minutes will show another 6-3 split within the MPC, and central bank Governor Mervyn King may continue talk down speculation for higher borrowing costs as the central bank aims to encourage a sustainable recovery. According to Credit Suisse overnight index swaps, investors are now pricing the benchmark interest rate in the U.K. to increase by 50bp over the next 12-months, and the GBP/USD may trade within a broad range in the days ahead as investors weigh the prospects for future policy. However, as the DailyFX Speculative Sentiment currently stands at -1.39, the contrarian indicator suggests that the pound-dollar will continue to trend higher over the near-term, and the pair may hold steady throughout the week as the BoE is scheduled to release its policy statement on April 20.

The Euro pared the previous day’s decline as the European Central Bank pledged to normalize monetary policy further over the coming months, and the EUR/USD may continue to retrace the decline from all the way back in 2009 as interest rate expectations continue to support the single-currency. ECB board member Juergen Stark said the central bank will adjust the interest rate at an “appropriate pace” as the risk for inflation materialize, and went onto say that economic activity in the first-quarter may be ‘stronger than expected’ as the recovery gathers pace. As the Governing Council sees scope to reestablish its exit strategy over the coming months, the EUR/USD is likely to maintain the upward trend from earlier this year, and the bullish sentiment underlying the single-currency may gather pace going into the middle of the week as the exchange rate clears 1.4500 for the first time since January 2010.

Nevertheless, the Bank of Canada held the benchmark interest rate at 1.00% in April and pledged to carefully consider future rate hikes given the ‘material excess supply’ in the real economy, and sees the headline reading for inflation at the 2% target by the middle of 2012 as the central bank expect GDP to increase 2.9% this year amid an initial projection for a 2.4% expansion in the growth rate. Indeed, currency traders show a bearish reaction to the policy statement as the BoC continued to talk down speculation for higher borrowing costs, and the Canadian dollar may lose ground throughout the remainder of the week as interest rate expectations falter. Meanwhile, market participants shifted away from the greenback and flooded into the Swiss franc following the flight to safety, and the greenback may struggle to hold its ground throughout the North American trade as Fed officials maintain a cautious outlook for the region. NY Fed President William Dudley held a cautious look for the world’s largest economy as he expects unemployment to come down ‘slowly,’ and the dovish rhetoric held by the FOMC may continue to bear down on the greenback as the central bank continues to carry out the additional $600B in quantitative easing.

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